Futures Charts

When you’re looking at using long-term charts in connection with your trading, you may wonder how you can apply this to the futures markets. Futures markets, and for that matter options too, have expiry dates associated with them, which means that the same contracts do not run over periods of years. The longest life of a futures contract is probably around 18 months. That presents a potential problem if you want to review the long-term charts first, as recommended, before trading.

Practical Example of Multi-Timeframe Analysis

As a reminder, a futures contract is a contract with a set price and date for the purchase of some commodity or financial security. They are frequently traded for their current value, and most speculative futures contracts do not result in taking delivery of the commodity. The contract is simply a commitment for a future transaction, and when the date for that transaction arrives, there may be a cash settlement either way between the contracted price and the current market price of the commodity.

What commonly happens is that you open a position, whether short or long, with a futures contract. Over time, you may find that it has increased in value, and you can close the position by taking the opposite position – if you were long, you take a short contract and vice versa.

As stocks and shares will usually have price records going back to the company’s initial public offering (IPO), there is no problem constructing long-term charts for these equities. Because futures contracts have a limited life, there’s an obvious problem with trying to chart and review the long-term trends. Technical analysts get around this problem by constructing ‘continuation’ charts for the futures they are interested in.

One of the easiest ways of doing this is to roll over from each expiring chart to the next one. When a futures contract is coming up to expiration, just use the next one to expire as a price basis for charting. It’s a method that generates a lot of data.

This method, though simple, is not without some drawbacks. When futures contracts are getting to the expiration date, the pricing can become distorted, then there may easily be a jump in price when switching to the next contract. As people cease to trade the expiring contract, the pricing can be subject to some volatility which will affect the numbers.

Analysts get around this in a variety of ways. Some just move on to the next contract when the first has less than a month to run, so that they avoid any price distortions that happen close to expiration date. Others will just ignore the contract that expires first, and base their prices for charting on the second or third contracts, rolling them over as necessary. That is, they never use the next contract to expire. As you are really looking for the most popular pricing to get the most valid number, other analysts consider the best indication is taking the value of the futures contract that has the most open interest, so the most market participation, regardless of expiration date.

Another approach favored by some traders is to chart prices for contracts expiring in the same month each year. For instance, you might combine July corn futures prices from year to year. This method has the common sense approach that futures in agricultural products may show seasonal variations, so it is best not to try and combine futures of crops for delivery in different seasons. W.D. Gann, who is known amongst traders for the technical analysis work that he pioneered, favored using this method, so it’s sometimes referred to as the ‘Gann Contract’.

The company Commodity Systems Inc. (www.CSIdata.com) provides market data, and has a couple of proprietary concepts for historic futures pricing which fall under the title of Perpetual Contract. One formula requires the trader to name a time, such as three months or six months, and the two futures prices which bracket this time are combined in a weighted manner. This was the original formula that they developed, but they also offer an alternative now, where the price is generated from all contracts by applying a weighting according to the open interest. This means the future contracts with the greatest open interest have a bigger effect on the number.

Now CSI do the work for you with their software, but there is nothing stopping you from doing a set of similar calculations for yourself, if you have some mathematical inclination. If you can program it on to a spreadsheet you will get a set of numbers fairly easily. You might even try to ‘improve’ on their methods by combining the open interest and date weighting methods; you just have to see what works out best for you.

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